What is the difference between Islamic bonds and conventional bonds?
Islamic bonds are similar to conventional bonds in Malaysia. It always has fix term maturity, can bear a coupon, and trades on the normal yield price relationship (see attached appendix II on calculation method). For conventional investors, the structuring of the bonds by the issuer is immaterial. The difference lies only in the way the issuer structure the bonds.An Islamic bonds is structured such that the issuance is not an exchange of paper for money consideration with the imposition of an interest as per conventional. It is based on an exchange of approved asset for some financial consideration that allow the investors to earn profits from the transactions. Approval of the assets and the contract of exchange would be based on Syariah (Islamic law) principles , which is necessary to meet the Islamic requirement.
The various type of Islamic-based structures used for the creation of Islamic bonds are sale and purchase of an asset based on deferred payment, leasing of specific assets or participation in joint-venture businesses.
Is there any liquidity premium in holding Islamic bonds?
Islamic bonds traded actively in the market by both the conventional and Islamic players. The system of Principal Dealership applies to the government issued bonds; there are currently 10 principle dealers for Islamic bonds, the same parties as those for conventional government bonds. The principle dealers are obliged to make market for Government Islamic instruments by quoting 2 way prices, and in addition, respective lead arrangers will make the market for the Islamic private debt securities.The Islamic bond market in Malaysia has seen outstanding growth, and has established itself as a viable alternative investment for both Islamic and conventional investors. Charts and data non the outstanding amount of the various Islamic bonds in Malaysia is attached in Appendix I.
Is there any difference in term of investors' protection against default?
The Islamic bonds share the same criteria as the conventional bond in the matters of non-payment/late payment of the profit portion and the principal amount.What are the Islamic bonds available in Malaysia?
There are three types of Islamic bonds issuers
a. Government
Government Investment Issues (GII)
- Issued by the Government of Malaysia
- Governed by the Government Investment Act 1983; provides the power for the government to borrow via Islamic principle for its general financing.
- Currently only zero coupon bonds issued
- Syariah principle: debt based (securitisation of government assets, but not a direct claim of assets as in an Asset-backed securities)
- Total outstanding balance as at end of 2003 is RM7b, up to a limit of RM15b imposed by the Act.
- Tradable since June 2001.
- Issued on a pre-announced calendar.
b. Quasi Government
Khazanah Benchmark Bond
- Khazanah Benchmark Bond was issued by Khazanah Nasional Berhad (fully owned by the government)
- Issued mainly for long-term financing purposes
- Zero coupon
- Syariah principle: debt based
- Total outstanding balance as at end of 2003 is RM10b (maximum limit)
c. Corporate bonds
- Known as Islamic Private Debt Securities(IPDS)
- Issued by big corporations in Malaysia
- Minimum period of 3 years and maximum of 20 years
- Approval from Security Commission and Central Bank required
What are the principles used for issuance of Islamic bonds?
Currently, there are 3 structures
1. Debt based
- This is the most commonly structured Islamic bond in Malaysia and can be issued based on fixed or zero rate coupon
- Malaysian GII and Khazanah bonds are based on this principles
- Process: I) issuer identified assets, ii) Islamic banking institution then purchased these assets on competitive tender basis under Islamic principles, proceed paid to the issuer, iii) immediately re-sell the assets to the issuer at the selling price and at the same time issuer will issue bonds.
- Traded in the secondary market via the concept of debt trading.
2. Asset based
- Securities that evidences ownership in income generating assets
- Such assets are normally structured to be owned by special Purpose Vehicle (SPV) which in turn act as lessors and issuer as the lessee
- Holders will benefit from the cashflow generated through the lease
- This structure allows for both fixed and floating rate
3. Equity based
- A bond that represents common ownership and entitles the holders shares in a specific project
- Shares of profit are determined beforehand by a definite proportion of the total bond amount
- Although it is similar to shares, it has a fixed maturity which is determined by the tenure or project completion date
- This structure normally bears a floating rate
Companies Interested in Islamic Finance
• Aayan Leasing & Investment • AB Invest • ABC Islamic Bank • Abdul Latif Jameel Co • Abdul Raman Saad & Associates • Abdulla Fouad Holding • Aberdeen Asset Management • ABN Amro • Abu Dhabi Commercial Bank • ACI Real Estate • Affin Bank • Affin Investment Bank • Affin Islamic Bank • Al Arabi Investment Group • Al Khabeer Financial Advisors • Al Mal Capital • Al Rajhi Bank • Al Tamimi & Co • Albar & Partners • AlBaraka Islamic Bank • Allen & Overy • Al-Muthanna Investment Company • Alshaya Group • Amana Investments • AmBank • AmIslamic Bank • AmMerchant Bank • ANZ • Arab Banking Corporation • Arab Finance House • Arab Investment Company • Arab National Bank • Arab Petroleum Investments Corporation • Arcapita Bank • Arif Habib Investment Management • Aseambankers
